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Insolvency, Bankruptcy, Individual Voluntary Arrangements Insolvency

Insolvency happens to an individual or business when their liabilities exceed their assets or when they can no longer meet their obligations as and when they are due. The second example, is also referred to as 'cash flow insolvency' - where in the case of a company an otherwise profitable concern can be made insolvent by their inability to get monies owed to them in a timely way.

Bankruptcy

Individual Insolvency is also known as bankruptcy. In the UK, it is dealt with by the Insolvency Service (which is a branch of the Department of Trade & Industry). When an individual goes bankrupt, all of their assets are collected and distributed amongst their creditors. While you are stripped of your assets, you are also stripped of your debts and are now bankrupt. Bankruptcy offers a way for individuals to walk away from overwhelming debts and once the bankruptcy is over allows an individual to make a fresh start (although you should be aware that the consequences of bankruptcy such as having to pay subprime rates on mortgages and difficulty in getting credit cards).

Bankruptcy used to last a period of 3 years but following the Enterprise act this has been reduced to 1 year in many cases (again there are exceptions to this if you have behaved in a reckless or fraudulent way). You should visit the Insolvency Service www.insolvency.gov.uk for further information on this.

In addition to reducing the length of time that an individual is bankrupt, the stigma of bankruptcy is no longer what it once was, although it is a very serious decision and one that has major consequences. You should definitely look at getting professional advice before you consider bankruptcy and explore whether alternatives such as IVA (individual voluntary arrangements) or a debt management plan is a more suitable path. When weighing up the options, you should give serious consideration to the benefits and disadvantages of each route and make a reasoned decision. Often, when people are facing overwhelming debt the anxiety from this situation prevents them from looking at all the options carefully. It's worth seeking advice from a qualified insolvency practitioner, Citizens advice Bureau or other qualified individuals such as an accountant.

What happens once you've been made bankrupt?

In many ways once you've been made bankrupt a lot of uncertainty is removed. Your financial affairs will now either be handled by an official receiver or an insolvency practitioner. They will make a full report of your financial affairs, try to determine the cause of the bankruptcy and list your assets and liabilities. It is then the job of the Official receiver or Insolvency Practitioner to realise your assets (i.e. sell them) and distribute them to your creditors. As a bankrupt, you no longer control your assets. There are specific rules governing your house and it's best to seek advice on these from the official receiver or your Insolvency practitioner. During the period of your bankruptcy, the official receiver or your insolvency practitioner may also determine that your earnings are sufficient to enable you to make payments to your creditors (this can be for a period of up to 3 years). There are a number of restrictions during bankruptcy such as not being able to borrow more than £500 without telling the creditor or being concerned in promoting, forming or managing a limited company.

It is very important that you take the restrictions during your bankruptcy seriously or you run the very real danger that the length of the bankruptcy will be extended. It is in your interests to cooperate with the Official Receiver / Insolvency Practitioner to ensure you are discharged from Bankruptcy.

Bankruptcy is unpleasant, but bankrupts often find that it gives them the ability to put a line under a period of their life and make a fresh start. The loss of control you experience during your bankruptcy can be mitigated by the fact that you will be discharged and free to start again. It's not a fun time, but you should focus on learning from your mistakes and remembering that you can start again. It’s vital to be positive and remind yourself that you will get through this.

Alternatives to Bankruptcy

Bankruptcy is not always the best route to take, which is why it is vital you seek advice from a professional insolvency practitioner. You may be able to make an informal arrangement with your creditors. Often people will use the services of a debt management company to do this. This has the advantage of placing a 3rd party between you and your creditors. The guiding principle that a small payment is better than no payment is often considered to be a worthwhile arrangement for the creditor. However, these types of informal arrangements are not legally binding, so your creditors could decide at any point to ignore the arrangement and press ahead with bankruptcy. A similar arrangement is a court appointed administration order where if your debts are under £5000 the court can order you to pay a certain amount on a regular basis to your creditors.

IVA - Individual Voluntary Arrangements

This is a formal arrangement with your creditors made in conjunction with the court and your insolvency practitioner. Your insolvency practitioner will look at your assets and determine whether to call a meeting of your creditors. At the meeting of creditors the proposal for payments will be made and if 75% of the creditors agree the IVA will go into force. If an IVA is appropriate, you must ensure that you keep up with the terms of the agreement. There are many advantages to IVA's over bankruptcy, although you should make a choice that is appropriate for you circumstances.

No matter what route you take, try and be positive during what is often a sad time. Remember that many people have been through this experience and try to ensure you don't put yourself through this again. It's always darkest before the dawn and your sun will rise again. Good Luck!

Insolvencydirectory.co.uk provides a free listing of insolvency practitioners in the UK